Nintendo Is Reported in Talks to Buy Sega

Published: December 27, 2000

Nintendo's Super Mario may be coming to the rescue of Sega's Sonic the Hedgehog.

Nintendo , the Japanese video game systems company that popularized arcade-style games at home, is in talks to buy Sega , the beleaguered video game maker that revolutionized the industry in the early 1990's with its fanciful characters and eye- popping virtual worlds.

According to executives close to the negotiations, the two companies are holding discussions that could lead to Nintendo acquiring Sega for about $2 billion, though the terms of the transaction are still being negotiated.

The talks have been going on in fits and starts for months, the executives said, and the deal could still collapse.

A Sega spokesman, Munehiro Umemura, strongly denied a deal was in the works. He said the idea was "absolutely outrageous" and used a Japanese word that can mean unfounded rumor or outright falsehood.

A spokesman for Nintendo laughed when asked whether the companies were in talks. "In this industry there are various kinds of rumors."

Sega's chairman, Isao Okawa, has been trying to sell the company for some time, the executives said, and has even held talks with Microsoft , which is itself planning to enter the video game business by next Christmas with a next-generation console called the Xbox.

Sega is in a precarious position as sales of its game console, Dreamcast, missed the company's own forecasts by a million units. Analysts expect Sega to post its fourth consecutive annual loss when its fiscal year ends in March. The company lost $357.4 million last year, and the loss probably widened this year, they said. Sega's American depository receipts have fallen 74 percent this year.

Kmart, one of its biggest retailers, dropped the Dreamcast from its shelves in August, making it that much harder for sales to recover. Despite Dreamcast's advanced technology and record-setting introduction in September 1999 — it sold 500,000 units in that month alone — Sony's PlayStation 2 this year broke that record and all but obliterated Dreamcast's lead.

Sega has been struggling ever since Sony entered the video game market in the United States in 1995. While hard-core game-players like its machines, Sega lacked the marketing muscle and savvy to attract the legions of everyday users that made Sony's PlayStation the best-selling game console in the world.

As of Nov. 18, Sega's share of the North American market for game consoles had fallen to 17.5 percent in the fourth quarter of this year from 18.8 percent in the corresponding period of 1999, according to PC Data, a market-data company in Reston, Va. Sony, after introducing its faster and more realistic PlayStation 2 this fall, now commands a total of 67.9 percent of North American sales, up from 49.1 percent last year. Nintendo is in third place in hardware sales, with 14.8 percent, but is the leader in the more-profitable business of software publishing, paced by its Pokémon games.

Although Sega was the first to introduce a 128-bit microprocessor, which allows sophisticated graphics, the Dreamcast never could sustain momentum. Initial sales were marred when the NEC Corporation had trouble producing enough of the complex chips that generate the real- time visual images that Sega promised for the Dreamcast.

By the time more chips became available, Sony was promoting the PlayStation 2 and Nintendo was dropping hints about a new machine it calls GameCube.

Sony and Microsoft are clearly aiming to exploit the convergence of computing, digital technology and the Internet, offering consumers a hybrid device that does far more than play games, analysts say. To compete, companies must be able to make huge investments and have access to technological know-how that goes beyond gaming, they said.

But to woo consumers away from PlayStation 2, which was introduced in the United States in October, Sega slashed the price of Dreamcast by 25 percent earlier this year. Dreamcast sells for $149; PlayStation 2's suggested retail price is $299.

It is not clear how much the companies make selling hardware. But the consoles are seen as a means of pumping up software sales, where margins are higher, and it is in the software business that Sega presents some attraction for potential buyers.

While Sega ranks only 13th in software sales in North America — after both Nintendo and Sony and software specialists like Electronic Arts — it is developing software for Nintendo's hand-held Game Boy unit, and analysts in Japan consider its software development arm to be strong.

Software developers have complained that it is difficult to design games for the PlayStation 2, which gives Sega and others an opportunity to cut into the huge competitive edge Sony built for itself with the original PlayStation.

Despite its well-chronicled woes, Sega has several strengths. Its arcade business is thriving, and as video games move online to attract players, that business could present some interesting opportunities to a company that had the wherewithal to exploit it.

It has also begun signing up users for its Sega.net, offering subscribers a free Dreamcast console if they agree to use its Internet service for 18 months.